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Referendum Frenzi

15 November 2016

Robert Nye - Wealth Manager

In case you have missed the coverage, the US presidential election is now behind us. After President-elect Trump’s success and following the ‘Brexit’ referendum over the summer, potential constitutional crises have never been more in vogue. With this in mind, the world’s attention will now shift to the upcoming referendum in Italy. On 4th December, the Italian electorate will go to the polls to vote on the fundamental changes to their country’s constitution.

As it stands, the Italian constitution specifies a “perfectly symmetric bicameral legislature”. To British minds, this snappily-named system can be thought of as having two identical clones of the House of Commons rather than the Commons and the Lords having varied roles and responsibilities. In Italy, both the lower house (the Chamber of Deputies) and the upper house (the Senate of the Republic) are elected at the same time, for the same five year term, and the government must have the confidence of both. Some suggest this is one of the reasons the country has had 63 administrations in 70 years.

Importantly, both houses have to agree identical wording (completely identical) before any legislation can be passed into law. This can lead to an interminable back-and-forth between the Chamber and the Senate that can make lawmaking a slow process at best. .

Italy’s Prime Minster, Matteo Renzi contends that he will be better able to govern with a muzzled Senate. To this end, the constitutional reforms include reducing the Senate to a 100-member body of councillors and governors from the regions. This would be a completely different institution to the current incarnation with 315 directly-elected Senators. There also are other changes: alterations to the legislative process, not least tight time-limits, and clarification of the responsibilities at regional and national levels. No more passing the bucatini, then.

Critics in the ‘No’ camp contend that the proposals would allow the prime minister too much power, particularly as the current incumbent is perceived as controlling. They also point out that Italy passes more legislation each year than many of its Western counterparts. It has also been argued that the proliferation of governments in the last 70 years has been more to do with the fractured and divided nature of the Italian electorate than a system that does not reflect it.

The changes are hotly debated (to say the least) but the referendum has been given extra weight by the fact that Mr Renzi has vowed to resign should he end up on the losing side. To investors, this is a potentially more significant factor than the failure to pass the reforms. Italy is in a fragile state economically as well as politically, as has been the case for a very long time, it seems one misstep away from a potential banking crisis.

Furthermore, the referendum is also another opportunity for the populists, buoyed by results from elsewhere in the world, to land another blow against the established mainstream. In Italy this is led by the ‘Five Star Movement’, notably led by a comedian (literally, rather than the accusation levelled at other similar parties) and is highly Eurosceptic.

Next year will bring a Dutch general election and French presidential election in spring, with German federal elections to follow later. Anti-Europeans are doing well and will only gain more momentum if the Italian referendum is interpreted as another vote against the establishment.

The latest polls (if it is possible to put any faith in polls any longer) are pointing towards a ‘No’ vote and therefore one suspects that markets are ‘pricing in’ the short-term impacts. Such a result, in the context of what has passed in 2016 and what is to come in 2017, would however reinforce uncertainty about the political status quo in the West. Expect more volatility ahead.